City presses WH Smith to dispose of Do It All

DIY disaster: Investors lose patience with beleaguered chain's slender margins as competition from B&Q and others grows even stronger

RUSSELL HOTTEN

Pressure is mounting on WH Smith to close or sell the heavily loss-making Do It All chain of DIY warehouse stores. Any upturn in Easter trading may be too late to save the struggling brand. Sources believe a strategic review of WH Smith may signal an early exit from the heavily overcrowded home improvements market.

The City certainly wants Bill Cockburn, WH Smith's chief executive, to get rid of the problem quickly, either by closing it down or selling it at a knock-down price. "Do It All's margins are among the worst in the sector, if not the worst," one institutional investor said at the weekend. "The losses being made seem bottomless."

Half-year results published in January showed that Do It All, which is jointly owned by WH Smith and Boots, suffered losses of pounds 7.7m, up from pounds 3m the year before, with sales down 3.2 per cent.

With no prospect of being able to stem the outflow, investors have started to lose patience with WH Smith. Unlike its partner, which benefits from the strong profits and cash flow of Boots The Chemists, it is unable to continue carrying the pain of its disastrous foray into DIY. WH Smith suffered total group half-time losses of pounds 45m, up from pounds 17m.

Mike Dennis, analyst at NatWest Securities, said that despite DIY chains' "slash and burn" attempt to cut costs and close sheds up and down the country there remained far too much capacity. Do It All is one of the market's four big players, the largest of which is B&Q, owned by Kingfisher. The others are Homebase and the struggling Texas chain, both subsidiaries of Sainsbury's.

Competing with the four majors at the heavier end of the business come DIY companies such as Wickes and builders merchants like Travis Perkins and Jewson, part of Meyer International. Wickes' recent price-cutting and advertising battle with B&Q underlined the intensifying competition that threatens further damage to Do It All, which as the industry's poor relation has little buying or pricing clout.

Nick Bubb, analyst at Mees Pierson Securities, believes things could get worse. "If B&Q's market dominance and profitability is under general threat, its reaction may be to get more aggressive," he said. The Kingfisher subsidiary needs to reassert its leadership after the embarrassing failure of Sir Geoff Mulcahy to endorse the position of B&Q chief executive Jim Hodkinson after press reports suggested he might be forced out of the company.

WH Smith sources said none of these rival operators had approached the company about buying Do It All. In fact, it is thought that WH Smith has not received an offer from anyone for the chain. Mr Dennis believes that Do It All's rivals are probably strong enough to ride out the remainder of the recession and hope the weaker chains go to the wall. They may then cherry-pick some of Do It All's better stores.

Homebase, currently converting the Texas stores it bought from Ladbroke last year for pounds 290m, has been a good example of how to manage a chain through the recession. Homebase has been one of the most profitable outlets of the past six years, and has seen profits rise from pounds 22m in 1994 to pounds 31m last year, with a further increase to pounds 37m pencilled in by analysts.

With such strong competitors in the market, many analysts believe Do It All's 190 stores should be closed. But with stores on an average lease of 10 years, some estimates put the cost of closure at well above pounds 200m. One WH Smith insider said: "Analysts say just get rid of the problem - close it. But the costs involved mean that is not a realistic option. We do, after all, have a duty to shareholders."

Another option is to continue trading and hope that things pick up. But Mr Cockburn, fresh from running the Post Office and with a mandate to change things, is unlikely to adopt the do-nothing approach.